Dubai not too keen on TSX-LSE merger: report

While Ontario’s finance minister has raised concern about a large Dubai-based sovereign wealth fund becoming the biggest shareholder of the Toronto Stock Exchange, the Dubai stock exchange appears not too keen on the deal either.

A report published Monday in local newspaper The National suggested officials at Borse Dubai gave only a “lukewarm” endorsement to the proposed merger of the London Stock Exchange with TMX Group Inc., the parent company of Canadian stock exchanges including the Toronto exchange.

“We didn’t have enough detail of revenue and cost synergies,” a Dubai exchange executive, who spoke on condition of anonymity, told the newspaper. “London wanted a statement of support, and of course we welcome anything that enhances the value of our shares, but it was pretty lukewarm,” the executive is reported to have said.

Borse Dubai has a 20-per-cent stake in the London exchange.

The landmark merger, intended to create the largest listings exchange in the world with commanding positions in natural resources, clean energy and derivatives, instantly drew criticism in Canada.

Ontario Finance Minister Dwight Duncan expressed concern about the Dubai interest last week, and said he considers the proposed merger a takeover of “a strategic asset” in Canada because the London exchange group will hold a 55 per cent stake in the merged entity.

Duncan also said of Dubai: “I’m not sure I want them owning our stock exchange.”

On Monday, federal Industry Minister Tony Clement said Ottawa will review the proposed merger — as triggered by the “net benefit” test of the Investment Canada Act. But he indicated the provinces would have a say over whether the deal was “viable.”

In response, the TMX and the London Exchange groups issued a joint statement saying they have “prepared carefully” for Industry Canada and have worked “to develop a set of undertakings that deliver clear benefits to Canada and Canada’s capital markets, while preserving financial regulation in Canada.”

There are provincial hurdles as well as both the Ontario and Quebec governments hold veto power. Ontario securities law prohibits anyone from holding more than 10 per cent of the stock exchange’s equity. Quebec earned a veto in 2008 when the Toronto and Montreal exchanges merged.

Louis Gagnon, a finance professor at Queen’s University’s school of business, said Duncan’s use of the term “strategic asset” makes him believe the deal could be blocked — even though he doesn’t he doesn’t think the status quo is an option.

“They’re going to have to market this union very carefully. It’s going to have to be a very strong case for Canada, for Toronto as a financial capital,” Gagnon said Monday. “They have their work cut out for them.”

However, a source close to the proposed transaction rebuffed Duncan’s characterization of the exchange as a “strategic asset” as out of date, noting that technology and communications have made it possible — and common — to trade a share anywhere in the world.

Though Duncan has raised concern over jobs in Toronto’s financial sector, observers say the Ontario finance minister has been the most vocal opponent of the proposed merger because the benefits are clearer for provinces such as British Columbia, Alberta and Quebec.

Calgary is to be a “centre of excellence” for energy business while Montreal is to be the hub for derivatives activity. Alberta and B.C. are to remain at the forefront of the venture exchange business.

The source close to the proposed transaction said it appears officials at the Montreal Exchange “are definitely on the favorable side, though they may have some requests that they want to put into the system.”

The source said the officials in Montreal “can see an opportunity on the derivatives side that they haven’t been able to see in the current configuration (of being just in Canada).”

Kevan Cowan, president of TSX Markets, said Toronto will also be prominent in the new configuration. Not only is it to be the home of the co-head office — with a countpart in London — it will be the global head of listings.

“So there’s going to be a lot going on in Toronto,” said Cowan. “All listings, whether they’re sector based or energy based, they will report into Toronto.”

But observers said the corporate functions, including finance, are less tangible as a growth franchise.

“Montreal is poised to have phenomenal growth opportunities,” said Gagnon. “(You) can’t say much about Toronto’s franchise.”

As well, energy listings and international listings might ultimately prove to be a better fit with the hub for those areas in Calgary and London, said Tony Baldanza, chair of the antitrust and competition law practice group at Fasken Martineau DuMoulin LLP in Toronto.

“It sound good. The question is, is it as good as it sounds,” Baldanza said.